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Chapter 2—Basic Accounting Concepts
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TRUE/FALSE
1. The basic elements of a financial accounting system include a framework for preparing
financial statements.
ANS: T
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-1
2. The accounting equation is expressed as follows: Assets = Liabilities + Stockholders' Equity.
ANS: T
PTS: 1
DIF: Easy
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-1
3. Any given transaction must affect at least two different parts of the accounting equation.
ANS: F
PTS: 1
DIF: Difficult
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-1
4. Dividends are an example of an expense.
ANS: F
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1
5. Retained earnings will be increased by the amount in the dividend account.
ANS: F
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1
6. By keeping a running total of the effects of transactions, the accounting equation provides a
framework for summarizing the effects of a series of transactions.
ANS: T
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-1
7. A business receives $10,000 cash for a sale of merchandise and records this receipt of cash
as an increase in accounts receivable by mistake. The accounting equation is still in balance.
ANS: T
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-1
2-2
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
8. The effect of every transaction is an increase or a decrease in one or more of the accounting
equation elements.
ANS: T
PTS: 1
DIF: Easy
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-1
9. The accounting equation can be expressed: Assets - Liabilities = Revenues.
ANS: F
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-1
10. When an accounts payable account is paid in cash, the stockholders' equity in the business
increases.
ANS: F
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1 | 2-2
11. A transaction can affect at most two elements of the accounting equation.
ANS: F
PTS: 1
DIF: Easy
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-1
12. When an account receivable is collected in cash, the total assets of the business increase.
ANS: F
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1 | 2-2
13. Equality of the accounting equation means that no errors have occurred.
ANS: F
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-1
14. It is possible for a transaction to change the makeup of assets, but to NOT affect assets in
total.
ANS: T
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-1
15. When capital stock is issued by a corporation for cash, both the income statement and the
balance sheet are affected.
ANS: F
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
16. Fees earned and received in cash will increase operating activity cash flows as well as
retained earnings.
ANS: T
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
17. Miscellaneous expenses are expenses that have an undetermined amount to be paid.
ANS: F
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
2-3
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
18. The payment of utilities expense in cash would affect the operating activities in the statement
of cash flows and the income statement but NOT the balance sheet.
ANS: F
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
19. Revenues decrease stockholders' equity.
ANS: F
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
20. The two sides of the accounting equation do NOT have to be equal.
ANS: F
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
MULTIPLE CHOICE
1. The basic financial statements do NOT include the
a. income statement.
b. tax return.
c. balance sheet.
d. statement of cash flows.
ANS: B
PTS: 1
DIF: Easy
NAT: AACSB Communication | AICPA FN-Reporting
OBJ: 2-1
2. Which of the following is NOT an element of the financial accounting system?
a. A set of rules for determining the recording of economic events
b. A framework for preparing financial statements
c. A set of rules for the stock exchange
d. Controls to determine whether errors occur during recording
ANS: C
PTS: 1
DIF: Easy
NAT: AACSB Communication | AICPA FN-Reporting
OBJ: 2-1
3. If a $15,000 purchase of equipment for cash is incorrectly recorded as an increase to
equipment and as an increase to cash, at the end of the period assets will
a. exceed liabilities and stockholders' equity by $15,000.
b. equal liabilities and stockholders' equity.
c. exceed liabilities and stockholders' equity by $30,000.
d. exceed liabilities and stockholders' equity by $40,000.
ANS: C
PTS: 1
DIF: Difficult
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-1
4. Which of the following is NOT considered to be a liability?
a. Note payable
b. Accounts receivable
c. Unearned revenues
d. Accounts payable
ANS: B
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1
2-4
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5. Which of the following statements is NOT true about liabilities?
a. Liabilities are debts owed to outsiders.
b. Account titles of liabilities often include the term “payable.”
c. Cash received before services are performed is considered to be a liability.
d. Liabilities do not include wages owed to employees of the company.
ANS: D
PTS: 1
DIF: Difficult
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1
6. Which of the following accounts is a stockholders' equity account?
a. Cash
b. Capital Stock
c. Prepaid Insurance
d. Accounts Payable
ANS: B
PTS: 1
DIF: Easy
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1
7. Which of the following group of accounts are all assets?
a. Cash, Accounts Payable, Buildings
b. Accounts Receivable, Revenue, Cash
c. Prepaid Expenses, Buildings, Patents
d. Unearned Revenues, Prepaid Expenses, Cash
ANS: C
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1
8. Which of the following situations increase stockholders’ equity?
a. Supplies are purchased on account.
b. Services are provided on account.
c. Cash is received from customers.
d. Utility bill will be paid next month.
ANS: B
PTS: 1
DIF: Difficult
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1
9. Stockholders’ Equity will be reduced by all of the following accounts EXCEPT:
a. Revenues
b. Expenses
c. Dividends
d. All of the above reduce Stockholders’ Equity.
ANS: A
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1
10. Expenses can be defined as
a. assets consumed.
b. services used in the process of generating revenues.
c. costs that have been incurred during the normal course of business.
d. all of these.
ANS: D
PTS: 1
DIF: Difficult
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1
2-5
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11. The gross increases in stockholders' equity attributable to business activities are called
a. assets.
b. liabilities.
c. revenues.
d. net income.
ANS: C
PTS: 1
DIF: Easy
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1
12. The payment of $15,000 for expenses was recorded by Spears Co. as an increase in cash of
$15,000 and a decrease in retained earnings of $15,000. What is the effect of this error on the
accounting equation?
a. Total assets will exceed total liabilities and stockholders' equity by $15,000.
b. Total assets will exceed total liabilities and stockholders' equity by $30,000.
c. Total assets will be less than total liabilities and stockholders' equity by $30,000.
d. The error will not affect the accounting equation.
ANS: B
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-1
13. Which of the following will increase stockholders’ equity?
a. Expenses > revenues
b. Owner investment
c. Accounts payable
d. Dividends
ANS: B
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-1
14. A __________ is an economic event that under generally accepted accounting principles
affects an element of the financial statements and must be recorded.
a. framework
b. control
c. set of rules
d. transaction
ANS: D
PTS: 1
DIF: Easy
NAT: AACSB Communication | AICPA FN-Reporting
OBJ: 2-2
15. The statement of cash flows is integrated with the balance sheet because
a. the cash at the beginning of the period plus or minus the cash flows from operating,
investing, and financing activities equals the end of period cash reported on the balance
sheet.
b. the cash at the beginning of the period plus or minus the net income equals the end of
period cash reported on the balance sheet.
c. the cash at the beginning of the period plus or minus assets and liabilities equals the
end of period cash reported on the balance sheet.
d. the cash at the beginning of the period plus or minus the cash flows from operating
activities equals the end of period cash reported on the balance sheet.
ANS: A
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
2-6
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
16. Hodges, Inc. had the following assets and liabilities as of September 30, 2011:
Assets
$56,327
Liabilities
$28,416
What is the stockholders’ equity of Hodges as of September 30, 2011?
a. $0
b. $27,911
c. $84,743
d. Cannot be determined with this information
ANS: B
PTS: 1
DIF: Easy
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-2
17. Hodges, Inc. had the following assets and liabilities as of September 30, 2011:
Assets
$56,327
Liabilities
$28,416
If assets increased by $3,914 and equity increased by $2,290, what is the increase or decrease
in liabilities of Hodges as of October 31, 2011?
a. ($1,624)
b. $1,624
c. $6,204
d. ($6,204)
ANS: B
PTS: 1
DIF: Easy
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-2
18. Rush Corporation borrowed $25,000 from the bank. Which of the following accurately
shows the effects of the transaction?
a. Increase cash $25,000 and decrease notes payable $25,000
b. Increase cash $25,000 and increase notes payable $25,000
c. Decrease cash $25,000 and decrease notes payable $25,000
d. Decrease cash $25,000 and increase notes payable $25,000
ANS: B
PTS: 1
DIF: Moderate
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
19. Flow, Inc. received cash from fees earned. How does this transaction affect the Statement of
Cash Flows?
a. Increase cash from Operating Activities
b. Increase cash from Investing Activities
c. Increase cash from Financing Activities
d. No effect on the Statement of Cash Flows
ANS: A
PTS: 1
DIF: Moderate
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
20. Philip Corporation purchased equipment on account. What is the effect of this transaction?
a. Cash will decrease and equipment will increase.
b. Total assets will remain unchanged.
c. Cash flow from Investing Activities will decrease.
d. Total assets and total liabilities will both increase.
ANS: D
PTS: 1
DIF: Moderate
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
2-7
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
21. Johnson, Inc. paid rent expense of $3,500 for the month of October. How are the accounts
affected due to this transaction?
a. Increase in cash $3,500 and increase in retained earnings $3,500
b. Increase in cash $3,500 and decrease in retained earnings $3,500
c. Decrease in cash $3,500 and decrease in retained earnings $3,500
d. Decrease in cash $3,500 and increase in retained earnings $3,500
ANS: C
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
22. Johnson, Inc. purchased land for cash. What effect does this transaction have on the
following accounts:
a. Increase in Cash and decrease in Land
b. Decrease in Cash and decrease in Land
c. Increase in Cash and increase in Land
d. Decrease in Cash and increase in Land
ANS: D
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
23. Johnson, Inc. issued $15,000 in capital stock in exchange for cash. What is the effect of this
transaction?
a. Total assets remain unchanged.
b. Cash flow from Financing Activities will increase.
c. Net Income will increase.
d. Total Retained Earnings will increase.
ANS: B
PTS: 1
DIF: Moderate
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
24. Johnson, Inc. receives $5,000 cash for fees earned. What is the effect of this transaction?
a. Total assets remain unchanged.
b. Cash flow from Financing Activities will increase.
c. Net income will increase.
d. Retained earnings will remain unchanged.
ANS: C
PTS: 1
DIF: Moderate
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
25. Stockholders’ Equity will be increased by all of the following accounts EXCEPT:
a. Dividends
b. Revenues
c. Owner investments
d. All of the above increase Stockholders’ Equity.
ANS: A
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Measurement
OBJ: 2-2
26. ABC Company deposited $20,000 in a bank account in return for issuing shares in the
corporation. This transaction would affect which two financial statement elements?
a. Assets and stockholders' equity
b. Assets and liabilities
c. Liabilities and stockholders' equity
d. None of these
ANS: A
PTS: 1
DIF: Moderate
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
2-8
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
27. BNC Company earns revenues and as a result collects cash. Which of the following financial
statement elements are increased?
a. Cash only
b. Stockholders' equity only
c. Liabilities
d. Cash and stockholders' equity
ANS: D
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
28. DAF Company paid a utility bill of $300 and paid rent of $700 in December. By how much
would these events reduce stockholders' equity?
a. $300
b. $1,000
c. $400
d. $700
ANS: B
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-2
29. Declaring and paying cash dividends affects which balance sheet accounts?
a. Cash only
b. Stockholders' equity only
c. Cash and stockholders' equity
d. Cash and capital stock
ANS: C
PTS: 1
DIF: Moderate
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-2
30. Which of the following transactions changes the mix of assets only?
a. Paid for supplies with cash
b. Borrowed money from Second National Bank
c. Received money for fees earned
d. Received a utility bill
ANS: A
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-2
31. If Assets have a balance of $40,000 and Stockholders' Equity has a balance of $30,000, then
Liabilities must have a balance of
a. $70,000.
b. $30,000.
c. $40,000.
d. $10,000.
ANS: D
PTS: 1
DIF: Easy
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-3
32. If Liabilities have a balance of $10,000 and Stockholders' Equity has a balance of $60,000,
then Assets must have a balance of
a. $50,000.
b. $60,000.
c. $70,000.
d. $10,000.
ANS: C
PTS: 1
DIF: Easy
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-3
2-9
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exhibit 2-1
Beginning of the year
End of the year
Total Assets
$100,000
$500,000
Total Liabilities
$ 60,000
$325,000
33. Refer to Exhibit 2-1. What is net income, assuming no stock was issued and no dividends
were paid?
a. $215,000
b. $175,000
c. $135,000
d. $40,000
ANS: C
PTS: 1
DIF: Difficult
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-3
34. Refer to Exhibit 2-1. What is net income, assuming no stock was issued and dividends of
$25,000 were paid?
a. $110,000
b. $150,000
c. $160,000
d. $200,000
ANS: C
PTS: 1
DIF: Difficult
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-3
35. Refer to Exhibit 2-1. What is net income, assuming $50,000 of stock was issued and no
dividends were paid?
a. $110,000
b. $85,000
c. $70,000
d. $200,000
ANS: B
PTS: 1
DIF: Difficult
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-3
36. Refer to Exhibit 2-1. What is net income, assuming $50,000 of stock was issued and $25,000
of dividends were paid?
a. $110,000
b. $150,000
c. $190,000
d. $15,000
ANS: A
PTS: 1
DIF: Difficult
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-3
37. Gibbs Company has $16,000 in Retained Earnings, $27,000 in Assets, and $5,000 in
Liabilities. How much is in Common Stock?
a. $22,000
b. $16,000
c. $11,000
d. $6,000
ANS: D
PTS: 1
DIF: Difficult
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-3
2-10
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
38. A to Z Corporation engaged in the following transaction "Paid a $10,000 cash dividend." On
the Statement of Cash Flows, the transaction would be classified as
a. Cash Flows from Operating Activities.
b. Cash Flows from Investing Activities.
c. Cash Flows from Financing Activities.
d. Noncash transaction.
ANS: C
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-3
39. A to Z Corporation engaged in the following transaction "Purchased a building for $80,000
cash." On the Statement of Cash Flows, the transaction would be classified as
a. Cash Flows from Operating Activities.
b. Cash Flows from Investing Activities.
c. Cash Flows from Financing Activities.
d. Noncash transaction.
ANS: B
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-3
40. A to Z Corporation engaged in the following transaction "Issued a $30,000 note payable to
borrow cash from the bank." On the Statement of Cash Flows, the transaction would be
classified as
a. Cash Flows from Operating Activities.
b. Cash Flows from Investing Activities.
c. Cash Flows from Financing Activities.
d. Noncash transaction.
ANS: C
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-3
41. An increase in Stockholders' Equity from revenues earned will also result in an increase in
a. liabilities.
b. assets.
c. expenses.
d. cash flow from financing activities.
ANS: B
PTS: 1
DIF: Moderate
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
42. For EFG Co., the transaction "Payment to creditors" would
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease stockholders’ equity.
ANS: B
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
43. For EFG Co., the transaction "Cash sales to customers" would
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease stockholders’ equity.
ANS: A
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
2-11
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
44. For EFG Co., the transaction "Payment of interest expense" would
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. increase stockholders’ equity.
ANS: B
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
45. For EFG Co., the transaction "Purchase of store equipment with cash" would
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease stockholders’ equity.
ANS: C
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
46. For EFG Co., the transaction "Payment of dividends" would
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. increase stockholders’ equity.
ANS: B
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
47. For EFG Co., the transaction "Purchase of store equipment with a note payable" would
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease total liabilities.
ANS: A
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
48. For EFG Co., the transaction "Payment of quarterly taxes" would
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. increase stockholders’ equity.
ANS: B
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
49. For EFG Co., the transaction "Receipt of interest income" would
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease total liabilities.
ANS: A
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
2-12
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
50. For EFG Co., the transaction "Receipt of a utility bill" would
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease total liabilities.
ANS: C
PTS: 1
DIF: Moderate
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
51. For EFG Co., the transaction "Billed a customer for fees earned" would
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. increase total liabilities.
ANS: A
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
52. The income statement for August indicates net income of $50,000. The corporation also paid
$10,000 in dividends during the same period. If there was no beginning balance in
stockholders' equity, what is the ending balance in stockholders' equity?
a. $40,000
b. $50,000
c. $10,000
d. $60,000
ANS: A
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-3
53. Anthony, Inc. buys land for $50,000 cash. The net affect on assets is
a. $50,000 increase.
b. $0.
c. $50,000 decrease.
d. $25,000 increase.
ANS: B
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-3
54. Declaring and paying cash dividends affects which accounts?
a. Cash only
b. Capital stock only
c. Cash and retained earnings
d. Cash and capital stock
ANS: C
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
55. Buying equipment for cash affects which accounts?
a. Cash only
b. Retained earnings only
c. Equipment and retained earnings
d. Cash and equipment
ANS: D
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-3
2-13
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
56. Receiving cash for fees earned affects which financial statement elements?
a. Assets only
b. Stockholders' equity only
c. Assets and stockholders' equity
d. Assets and liabilities
ANS: C
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-4
57. Paying expenses affects which financial statement elements?
a. Assets only
b. Stockholders' equity only
c. Assets and stockholders' equity
d. Assets and liabilities
ANS: C
PTS: 1
DIF: Easy
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-4
58. The payment of a liability
a. decreases assets and stockholders' equity.
b. increases assets and decreases liabilities.
c. decreases assets and increases liabilities.
d. decreases assets and decreases liabilities.
ANS: D
PTS: 1
DIF: Moderate
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OBJ: 2-5
59. The first month of operation showed the net cash from operating activities to be $3,760, the
net cash from investing activities to be ($5,415), and the ending cash balance to be $3,425.
The net cash from financing activities must be
a. $1,770.
b. $5,080.
c. $5,750.
d. $12,600.
ANS: B
PTS: 1
DIF: Moderate
NAT: AACSB Analytic | AICPA FN-Reporting
OBJ: 2-5
PROBLEM
1. What are the basic elements of a financial accounting system?
ANS:
A financial accounting system is designed to produce financial statements. The basic
elements of a financial accounting system include:
(1) A set of rules for determining what, when, and how much should be recorded for
economic events
(2) A framework for preparing financial statements
(3) One or more controls to determine whether errors may have arisen in the recording
process.
PTS: 1
DIF: Moderate
OBJ: 2-1
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
2-14
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2. Calculate the following:
(a) Determine the cash receipts for May based on the following data:
Cash payments during May
Cash account balance, May 1
Cash account balance, May 31
(b)
$42,500
3,750
6,000
Determine the cash received from customers on account during May based on the
following data:
Accounts receivable account balance, May 1
$11,500
Accounts receivable account balance, May 31
8,250
Fees billed to customers during May
28,000
ANS:
(a) $44,750 ($6,000 + $42,500 - $3,750)
(b) $31,250 ($11,500 + $28,000 - $8,250)
PTS: 1
DIF: Difficult
OBJ: 2-1
NAT: AACSB Analytic | AICPA FN-Measurement
3. The accounting equation "Assets = Liabilities + Stockholders' Equity" is affected by
transactions. Is it possible to have a transaction that only impacts one financial element of the
equation? Two elements? Give examples.
ANS:
Yes to both questions. Examples include: (1) increase cash and decrease equipment;
(2) increase cash and increase stockholders' equity.
PTS: 1
DIF: Moderate
OBJ: 2-1
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
4. Letty's Laundry and Dry Cleaning incorporated and started business on January 1, 2011.
1 Letty's Laundry and Dry Cleaning began business by depositing $30,000 in a checking
account in the name of Letty's Laundry and Dry Cleaning, Inc. Capital stock is issued.
2 Borrowed $6,000 from City Bank.
3 Purchased equipment from Washers Wholesale, $16,200.
4 Purchased supplies costing $3,000 from Suds 'n Stuff with cash.
5 Paid one month's rent for business space in Pine Plaza, $1,000.
6 Services provided to customers during January totaled $13,400. All services were paid
for in cash.
7 Paid employees for January, $2,240.
8 Received and paid the utility bill, $500.
9 Received and paid the telephone bill, $250.
10 Paid dividends to the stockholders, $2,140.
Indicate the effect of each transaction on the accounting equation by listing the numbers
identifying the transactions, (1) through (10) in a vertical column, and inserting at the right of
each number the appropriate letter from the following list:
a. Increase in an asset, decrease in another asset.
b. Increase in an asset, increase in a liability.
c. Increase in an asset, increase in stockholders’ equity.
d. Decrease in an asset, decrease in a liability.
e. Decrease in an asset, decrease in stockholders’ equity
2-15
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
ANS:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
c
b
a
a
e
c
e
e
e
e
PTS: 1
DIF: Moderate
OBJ: 2-2
NAT: AACSB Analytic | AICPA FN-Reporting
5. Part A
Indicate the effect of each transaction during the month of October 2011 and the balances for
the accounting equation after all transactions have been recorded. No beginning balances
exist in the accounts. An accounting equation has been provided.
a. Opened a business bank account for Jones, Inc., with an initial deposit of $45,000 in
exchange for capital stock.
b. Paid rent on the office building for the month, $2,000.
c. Received cash for fees earned of $5,000.
d. Purchased equipment, $7,000.
e. Borrowed $20,000 by issuing a note payable.
f. Paid salaries for the month, $1,000.
g. Received cash for fees earned of $8,000.
h. Paid dividends, $3,000.
i. Paid interest on the note, $100.
Cash
Assets = Liabilities + Stockholders' Equity
Equipment Notes Payable Capital Stock Retained Earnings
a.
b.
c.
d.
e.
f.
g.
h.
i.
Bal.
Statement of Cash Flows
Income Statement
2-16
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Part B
Using the information from Part A, prepare (1) an income statement, (2) a statement of
retained earnings, (3) a balance sheet, and (4) a statement of cash flows for the month of
October.
Jones, Inc.
Income Statement
Jones, Inc.
Retained Earnings Statement
Jones, Inc.
Balance Sheet
2-17
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Jones, Inc.
Statement of Cash Flows
2-18
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
ANS:
Part A
a.
b.
c.
d.
e.
Cash
45,000
-2,000
5,000
-7,000
20,000
f.
g.
h.
i.
Bal.
-1,000
8,000
-3,000
-100
64,900
Assets = Liabilities + Stockholders' Equity
Equipment Notes Payable Capital Stock Retained Earnings
45,000
-2,000 Rent Expense
5,000 Fees Earned
7,000
20,000
-1,000 Salaries
Expense
8,000 Fees Earned
-3,000 Dividends
-100 Interest Expense
7,000
20,000
45,000
6,900
Part B
Jones, Inc.
Income Statement
For the Month Ended October 31, 2011
Revenues:
Fees Earned
Expenses:
Rent Expense
Salaries Expense
Interest Expense
Total Expenses
Net Income
$13,000
$2,000
1,000
100
3,100
$ 9,900
Jones, Inc.
Retained Earnings Statement
For the Month Ended October 31, 2011
Retained Earnings, October 1, 2011
Add: Net Income
Less Dividends
Retained Earnings, October 31, 2011
0
$ 9,900
(3,000)
$ 6,900
Jones, Inc.
Balance Sheet
October 31, 2011
Assets
Cash
Equipment
Total Assets
$64,900
7,000
$71,900
Liabilities
Liabilities
Notes Payable
$20,000
Stockholders' Equity
Capital Stock
Retained Earnings
Total Liabilities and Stockholders' Equity
$45,000
6,900
$51,900
$71,900
2-19
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Jones, Inc.
Statement of Cash Flows
For the Month Ended October 31, 2011
Cash flows from operating activities:
Cash receipts from operating activities
$13,000
Cash payments for operating activities
(3,100)
Net cash flows from operating activities
Cash flows from investing activities:
Cash payments for equipment
0
$ 9,900
(7,000)
Cash flows from financing activities:
Cash receipts from issuing capital stock
Cash receipts from note payable
Cash payments for dividends
Net cash flows from financing activities
Cash as of October 31, 2011
$45,000
20,000
(3,000)
62,000
$ 64,900
PTS: 1
DIF: Difficult
OBJ: 2-2|2-3
NAT: AACSB Analytic | AICPA FN-Reporting
6. Explain how the four financial statements are linked.
ANS:
A financial accounting system is designed to produce four financial statements. The income
statement, statement of retained earnings, and statement of cash flows are linked to an
element of the balance sheet.
(1) The income statement shows the net effects of revenues and expenses, which affects
the retained earnings on the balance sheet.
(2) The statement of retained earnings reflects the net income and dividends paid and
shows how retained earnings in the balance sheet moves from the beginning balance
to the ending balance.
(3) The statement of cash flows explains how the cash balance in the balance sheet moves
from the beginning balance to the ending balance by looking at the cash effects of
operating, investing, and financing activities.
PTS: 1
DIF: Moderate
OBJ: 2-3
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
7. How can a company earn a large net income and have a small balance in retained earnings?
ANS:
The company may pay out most of its earnings in dividends.
PTS: 1
DIF: Moderate
OBJ: 2-3
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
2-20
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
8. The following are included in Ace Auto Parts, Inc.'s December 31, 2010 balance sheet:
Accounts Receivable
$ 50,000
Building
100,000
Cash
60,000
Land
130,000
Accounts Payable
40,000
Notes Payable
70,000
Stockholders' Equity
?
Below are the balances for December 31, 2011:
Accounts Receivable
Building
Cash
Land
Accounts Payable
Notes Payable
Stockholders' Equity
$ 90,000
100,000
150,000
130,000
60,000
50,000
?
Analyze the changes in these balances and determine net income for 2011, assuming that the
only change to stockholders' equity is from net income.
ANS:
=
Bal. 12/31/2010
Assets
50,000
100,000
60,000
130,000
340,000
=
Bal. 12/31/2011
Assets
90,000
100,000
150,000
130,000
470,000
Liabilities
40,000
+
70,000
110,000
Liabilities
60,000
50,000
110,000
Stockholders' Equity ending balance
Stockholders' Equity beginning balance
Change - Net income
Stockholder's
Equity
230,000
+
Stockholder's
Equity
360,000
$360,000
230,000
$130,000
PTS: 1
DIF: Difficult
OBJ: 2-5
NAT: AACSB Analytic | AICPA FN-Reporting
2-21
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2-22
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
9. Refer to Coke’s balance sheet and answer the following questions:
(a) Did Coke issue any stock in 2008? If so, how many shares were issued and where
might this information be found?
(b) Did Coke repurchase any common stock in 2008? If so, how many shares were
repurchased and where might this information be found?
ANS:
(a) No, for both 2008 and 2007, Coke had 3,519,000,000 shares issued. The information
is in the Stockholders' Equity section of the Balance Sheet.
(b) Yes, Coke repurchased 6,000,000 shares of its common stock. The information is in
the Stockholders' Equity section of the Balance Sheet.
PTS: 1
DIF: Difficult
OBJ: 2-5
NAT: AACSB Reflective Thinking | AICPA FN-Reporting
OTHER
1. On May 1, the cash account balance was $72,600. During May, cash receipts totaled $345,600
and the May 31 balance was $95,230. Determine the cash payments made during May.
ANS:
95,230 = 72,600 + 345,600 - ?
Cash payments = $322,970
PTS: 1
DIF: Easy
OBJ: 2-2
NAT: AACSB Analytic | AICPA FN-Measurement
2-23
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.